Tag: Gaidar Institute

“Squandering”: Did the US Secretary of State Grasp the Russian Approach to Budget Spending?The Kremlin Accused the State Department of Tactlessness and Unprofessionalism, Yet Pompeo’s Remarks Were on the Mark
Yevgeny KarasyukRepublic
December 13, 2018

Venezuelan Defence Minister Vladimir Padrino gives his thumb up as he sits on the cockpit of a Russian Tupolev Tu-160 strategic long-range heavy supersonic bomber after it landed at Maiquetia International Airport, north of Caracas, on December 10, 2018. Courtesy of Federico Parra/AFP/Getty Images

Russian’s decision to send strategic bombers on a junket to an airport near Caracas elicited a curious reaction from US Secretary of State Mike Pompeo, who publicly expressed his pity for Russian taxpapers, whose money the Kremlin, habitually disregarding the costs, has been spending on its geopolitical moves.

“The Russian and Venezuelan people should see this for what it is: two corrupt governments squandering public funds, and squelching liberty and freedom while their people suffer,” Pompeo wrote.

The Russian Foreign Ministry responded by calling Pompeo’s statement “utterly unprofessional” and even “villainous.” Pompeo’s remarks, which the Kremlin, in turn, dubbed “inappropriate” and “undiplomatic,” were apparently really lacking in nuance: the hardships of Russians, fortunately, cannot yet be compared with the suffering of Venezuelans. But, hand on heart, was Pompeo so wrong when he talked about the losses to the Russian federal budget and lack of oversight?

Russian society has an extremely vague notion about how much the Kremlin’s expansionism has ultimately cost the country. According to calculations made by IHS Jane’s at the outset of Russia’s operations in Syria in autumn 2015, Russia could have been spending as much as $4 million a day. Later, the Yabloko Democratic Party, which is not seated in the Russian parliament, estimated the Kremlin had spent a total of 108–140 billion rubles [between $1.6 and $2.1 billion] on Syria. A more accurate assessment would be difficult to make. Experts doubt that anyone, including the Finance Ministry, keeps tabs on such expenditures. Thus, nobody knows the real cost of Russia’s involvement in the Syrian conflict, argues the Gaidar Institute’s Military Economics Laboratory.

The budget’s fading transparency has been a trend in recent years. In 2016, secret and top-secret allocations accounted for 22% of total federal budget expenditures, a record for the entire post-Soviet period, and much higher than secret allocations in comparable countries, according to RANEPA’s March 2015 report on the Russian economy.

Quite naturally, this state of affairs has not improved the quality of the state’s financial decisions. In terms of effective state spending, Russia ranked nineteenth in a new rating of twenty-five countries, compiled by the Higher School of Economics using data from the World Bank and OECD. Since they are not priorities for the current regime, problems with child mortality and life expectancy were among the reasons Russia ranked so low in the survey: the government spends more on the army than on healthcare—4.3% of GDP versus 3.8% of GDP, respectively. In these circumstances, the chances the Kremlin’s strategic projects in the Middle East and Africa (e.g., the Central African Republic, Burkina Faso, the Democratic Republic of the Congo, and Mozambique) will be decently funded are always much greater than the national healthcare project, which stipulated increased government spending on cancer treatment. The government nixed the plan over summer.

Since it remains largely Soviet in spirit, Russia’s foreign policy has been categorically blind to history’s lessons. The Soviet Union’s exorbitant geopolitical ambitions and support for fringe regimes around the world left the country with a legacy of mostly toxic multi-billion-dollar debts. The process of writing them off has been disguised as a form of international charity or, speaking diplomatically, official development assistance (ODA). According to RANEPA, writing off the debts of developing countries accounted for 35% of all such “international aid” last year or $425 million. It has been the Russian government’s usual way of doing business. Previously, the Russian government wrote off the debts of Nicaragua ($6.3 billion), Iraq ($21.5 billion), North Korea ($10.9 billion), Syria ($9.8 billion), Afghanistan ($11 billion), and Cuba ($29 billion), among other countries. Venezuela risks joining this sad list. Over the past twelve years, Russia has invested a total of $17 billion in the country.

Since it was paid for by the Russian federal budget, which has been running a deficit for the last seven years, Russian officials probably did not see the transatlantic flight of its strategic bombers as too expensive. On the contrary, they saw it as a flashy display of Russia’s military prowess and proof of its influence in the region. However, the government of Nicolás Maduro signed off on the stunt. Subject to growing pressure from creditors and an angry, desperate population, it lives day by day. In all likelihood, it will soon collapse, leaving behind a mountain of unpaid bills and unfulfilled obligations to its allies. If this is the case, can we evaluate the Russian government’s action better than the tactless Mike Pompeo did? Probably not.

Real incomes of Russians have declined for a second month in a row, Rosstat has reported. Their decline accelerated in September to 1.5% in annual terms after falling by 0.9% in August. Prior to that, they had grown for seven months, from the start of the year, by 1.7%. (This figure excludes the one-time 5,000-ruble payments made to pensioners in January 2017.) Real wages accelerated their growth in September, from 7.2% to 6.8% in the previous month.

Incomes of ordinary Russian had been falling for four years in a row, from 2014 to 2017, resuming growth only this year. In the first half of the year, they increased by 2.6%, mainly due to wage increases, notes Igor Polyakov from the Center for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP). Business income increased only by 0.7%, while social transfers (excluding the one-time payment to pensioners) increased by 1.2%, which was significantly weaker than all incomes generally. Other sources of income decreased. There was a slight increase in incomes derived from property, but incomes received from securities and deposits decreased, as did, apparently, incomes from unreported activity, says Mr. Polyakov. He argues it is unlikely circumstances have changed considerably in recent months.

But the anxiety of Russians caused by the volatility of financial markets has increased, says Mr. Polyakov. People have taken to withdrawing cash from foreign currency accounts and transferring it to safe deposit boxes, as well as spending it abroad on holiday. Rosstat cannot register these expenditures and thus reduces its assessment of miscellaneous income. In August, the public’s net demand for US dollars grew by comparison with July from $0.8 billion to $1.7 billion, an increase of nearly 53%, the Central Bank reported.

Retail growth slowed in September to 2.2% in annual terms from 2.8% a month earlier. It is likely the public preferred buying foreign currency while curtailing consumption, argues Mr. Polyakov.

The drop in incomes combined with the serious increase in wages [sic] remains a mystery, writes Dmitry Polevoy, chief economist at the Russian Direct Investment Fund. The growth in real incomes in the first half of 2018 was mainly due to the presidential election campaign, notes Vladimir Tikhomirov, chief economist at BCS Global Markets. Salaries in the public sector and pensions increased rapidly. [That is, the Kremlin bribed Russians directly dependent on its largesse to get out the vote for President-for-Life Vladimir Putin—TRR.] After the election, growth stalled. And, after a palpable devaluation of the ruble in April and accelerating inflation, a dip in incomes was anticipated, argues Mr. Tikhomirov. In September, prices for imported goods rose. In addition, the seasonal discount on fruits and vegetables ended, and the July increase in utilities rates made itself felt, explains Mr. Tikhomirov.

By the end of the year, the incomes of Russians will gradually decline a little, while overall incomes will grow less than 1% on the year, predicts Mr. Tikhomirov. Real incomes might grow by 2% on the year, counters Mr. Polyakov. In any case, this is noticeably lower than official forecasts. The Russian Economic Development Ministry anticipated a 3.4% growth in real incomes in 2018.

Real incomes of ordinary Russians fell by 1.7% in 2017, although the government had forecast a 1.3% increase, the Federal Audit Chamber noted in its opinion on the draft federal budget for 2019–2021. When the forecast was corrected, incomes had decline dsteadily from the beginning of the year, and there were no preconditions for rapid growth by year’s end, the auditors write.

President Putin has set a goal of halving poverty by 2024. (The official poverty rate last year was 13.2% of the populace.) The Economic Development Ministry’s forecast significantly increased the growth rate of real wages and anticipated higher growth rates for real incomes, which has raised doubts at the Audit Chamber. There is no wage increase for public sector employees planned in 2019, while the growth of wages in the private sector will depend on growths in productivity.

Rank-and-file Russians have been forced into debt, write analysts from RANEPA and the Gaidar Institute in their opinion on the draft budget. By mid 2018, Russians owed banks 13.7 trillion rubles (approx. 181 billion euros), an increase of 19% from the previous year, they write, and an amount that significantly outpaces the increase in nominal incomes. It is an alarming trend that means an increase in the amounts of money ordinary Russians spend servicing loans, experts warn.